The Quick and Dirty Retirement Quiz

I am often asked the $64,000 question by people from my generation, “Should I retire?”

Like any good salesman, I answer this question with a question, “Are you still having fun?” If the individual making the inquiry still enjoys their job I answer, “If you are still having fun, keep doing it.” If the answer is no then I proceed to the next question, “Can you afford to retire?”

For new readers, here is a fast way to get a ball park answer to that question.

Take your current combined household income before taxes. For this example let’s use $100,000.

Multiply that number by 0.8. According to the best studies I have found, retired folks spend about 80% in retirement compared to what they spent during their working lives. This multiplier can be lowered by moving from a high cost, high tax area to a low cost, low tax area or by consciously simplifying your life.

$100,000 X 0.8 = $80,000

From this number subtract any guaranteed income such as pensions, social security, or annuities. For this example let’s give the couple contemplating retirement $30,000 in pensions and $25,000 in Social Security.

$80,000 - $55,000 = $25,000

The remaining number, in this case $25,000 a year needs to come from your 401-K or other savings or investments. Take this number and divided it by 0.04. It has been demonstrated in a number of highly regarded studies that if you draw an amount equal to 4% of your retirement savings (assuming 50% in stocks 50% in bonds, CDs, and cash equivalents) in the first year of retirement; then continue to draw that amount adjusted for inflation until you die there is a very high probability (about 98%) that you will not outlive your money.

$25,000 ÷ 0.04 = $625,000

In this example the couple would need to have $625,000 in savings to maintain their current lifestyle in retirement. Ten years ago most people assumed about half that money would be in liquid investments and about half would come from the sale of their house. First they would downsize to a smaller inexpensive house or townhouse. Then when they were unable to maintain their retirement home, they would sell it and move to some form of assisted living.

Following the real estate crash of 2006 and the stock market crash of 2008, things have become a little more complicated. Be wary. Seek the counsel of more than one wise professional. Err on the side of caution, before making this decision.

There are many retirement calculators on the web. Some of them are very friendly. Some of them will tell you need to work until you die. Some of them will even run a monte carlo simulation on your data and give you dozens of possible outcomes based on a hundred years worth of data. I probably used all of them before making that fateful, nearly irreversible decision only five months ago.

If you can not afford to retire, you need to have a plan to reach your goals. Get out of debt! Do not carry a mortgage, car loans, or a credit card balance into retirement. It took me a good ten years of concentrated effort to make all the retirement calculators, even the really unfriendly calculators that I didn’t believe, tell me, “It’s OK. You can retire.” It may take some time and some effort, but you can get there too.

Now, Let’s be careful out there!